Proposed Angel Tax Credit

2007 Proposed Angel Tax Credit State of Tennessee Economic Advancement Initiative The Angel Network of Sumner County has drafted the following document addressing the need for an Angel Tax Credit in an effort to attract local Angel Capital, whether individual or institutional, into state specific funds focused on funding high growth local ventures in the seed or start-up phases. Rachael Qualls, Founder and CEO Angel Network of Sumner County 10/8/2007 Table of Contents I. II. III. IV. V. Introduction .........................................................................................................................3 About Angel Capital .........................................................................................................3 Tennessee’s Current Economic Advancement as Compared to Other States .....................4 Tennessee Start-up and Seed Investing Market .................................................................6 Review of Other State Credits ..........................................................................................7 A. North Carolina Angel Tax Credit Program........................................................................7 B. Maine Seed Capital Tax Credit Program ...........................................................................8 C. Arizona Angel Investor’s Tax Credit – SB 1335 ............................................................. 10 D. VI. VII. VIII. Louisiana Angel Tax Credit ........................................................................................ 11 Proposed Credit for Tennessee........................................................................................ 13 Access to Capital for Entrepreneurs (ACE) Act (H.R. 578) Fact Sheet ............................ 14 2007 Investment Bill Section-by-Section .................................................................... 15 A. Title I. SBIC Program .................................................................................................... 15 B. Title II. New Markets Venture Capital Program ............................................................. 15 C. Title III. Angel Investment Program .............................................................................. 17 D. F. Title IV. Surety Bond Program ................................................................................... 18 Title VI. Regulations ..................................................................................................... 19 E. Title V. Venture Capital Investment .............................................................................. 19 2 I. Introduction There are three steps that each of the top three states in economic advancement, California, New York and Texas has taken to reach this level of success and they are as follows: 1. Attract Capital: each state initiated programs and policies to attract private equity funds and capital to their regions. Each state also set up tax breaks for Angel investors to provide seed and start-up capital to local entrepreneurs. 2. Attract Innovation: By providing a source of capital for high growth start-up ventures, each state was able to attract specialty companies to their regions. 3. Attract Talent: Once these companies were funded, they each provided a demand for highly specialized talent. In order to meet the hiring demands of this new innovation, local Universities were able to offer programs in order to attract the most talented student population in the country. As one can see, the ability to ride the next wave of economic advancement within our country lies within a state’s ability to attract seed and start-up capital to its region. If Tennessee can provide the right incentives to mobilize its local resources, a.k.a Angel investors being individual and institutional, therein lies incredible potential for Tennessee to be the next leader in innovation and local economic advancement in the entire United States. II. About Angel Capital Angel investors are wealthy individuals who invest in high risk, early stage ventures by using a portion of their total investment portfolios to provide emerging companies with seed and startup capital through direct, private investments. Their goal is to achieve higher returns than typical public markets provide. Most angels are active investors who contribute their time and experience, as well as offer introductions to valuable contacts essential to the company's success. In the financial world today, angel investors are a critical and essential part of a healthy economy, particularly for the establishment and growth of early-stage companies. Experts estimate that, on a cumulative basis, the level of investments made by angels over the last 30 years has been double that of investments made by venture capitalists. 1 The Center for Venture Research (the “CVR”) at the Whittmore School of Business and Economics at the University of New Hampshire estimates that angel investments for 2003 were approximately $18.1 billion in 42,000 deals, down from the historical — last 10 years — investment trend of approximately $30 billion per year in 50,000 ventures. This investment amount is comparable to venture capital funds, which, according to the 1 According to statistics published by the National Venture Capital Association and the Center for Venture Research, University of New Hampshire 3 National Venture Capital Association, invested $18.2 billion in 2003, with only 2% of those dollars in seed or early-stage investments. III. Tennessee’s Current Economic Advancement as Compared to Other States Indicator Overall* Aggregated Knowledge Jobs Information Technology Jobs Employment in IT occupations in non-IT industries as a share of total jobs. Managerial, Professional & Tech Jobs Managers, professionals, and technicians as a share of the total workforce. Workforce Education A weighted measure of the educational attainment (advanced degrees, bachelor's degrees, associate degrees, or some college course work) of the workforce. Education Level of the Manufacturing Workforce A weighted measure of the educational attainment of the manufacturing workforce. Aggregated Globalization Score Export Focus Of Manufacturing Manufacturing export sales per manufacturing worker. Foreign Direct Investment The percentage of each state's workforce employed by foreign companies. Aggregated Economic Dynamism Scores "Gazelle" Jobs Jobs in gazelle companies (companies with annual sales revenue that has grown 20 percent or more for four straight years) as a share of total employment. Job Churning The number of new start-ups and business failures, combined, as a share of all establishments in each state. Initial Public Offerings A weighted measure of the value and number of initial public stock offerings of companies as a share of gross state product. Rank 39 39 34 42 26 Score 52.18 8.26 1.2% 23.1% 48.60 46 0.39 19 30 9 24 34 10.45 $26,083 5.7% 9.63 12.6% 19 20.2% 24 4.60 4 Aggregated Digital Economy Scores Online Population The percentage of adults with Internet access in each state. Commercial Internet Domain Names The number of commercial Internet domain names (".com") per firm. Technology in Schools A weighted measure of five factors measuring computer and internet use in schools. Digital Government A measure of the utilization of digital technologies in state governments. Online Agriculture A measure of the percentage of farmers with Internet access and who use computers for business. Online Manufacturers The percentage of manufacturing establishments with Internet access. Broadband Telecommunications A measure of the use and deployment of broadband telecommunications infrastructure over telephone lines. Aggregated Innovation Capacity High-Tech Jobs Jobs in electronics manufacturing, software and computer-related services, telecommunications, and biomedical as a share of total employment. Scientists and Engineers Civilian scientists and engineers as a percentage of the workforce. Patents The number of patents issued to companies or individuals per 1,000 workers. Industry Investment in R&D Industry investment in research and development as a percentage of Gross State Product (GSP). Venture Capital Venture capital invested as a percentage of GSP. 43 34 30 37 7.64 52.5% 0.58 1.33 43 47 2.07 1.30 22 30 86.5% 2.78 37 39 7.27 2.6% 35 42 28 0.34% 0.34 1.01% 37 0.13% 5 IV. Tennessee Start-up and Seed Investing Market The table below shows the amount of venture capital, not Angel investments, invested in Tennessee in the start-up and seed rounds as compared to that of North Carolina. As the chart below illustrates, total venture capital invested in North Carolina since 1996 is just over $221 million. However, since a tax credit was made available to Angel investors in 1999, Angel investment activity has increased by $1.72 billion. PricewaterhouseCoopers/National Venture Capital Association MoneyTree(tm) Report For State of Tennessee # of Year Investment Amount Deals 1996 $ 5,100,000.00 3 1997 $ 8,000,000.00 3 1998 $ 8,915,500.00 3 1999 $ 1,155,000.00 1 2000 $ 5,000,000.00 2 2001 2002 2003 2004 2005 2006 2007 Total $ $ $ $ $ $ $ $ 2,900,000.00 400,000.00 31,470,500.00 0 0 0 0 0 2 1 15 PricewaterhouseCoopers/National Venture Capital Association MoneyTree(tm) Report For State of North Carolina # of Year Investment Amount Deals 1996 $ 19,199,900.00 15 1997 $ 9,680,000.00 8 1998 $ 55,842,600.00 19 1999 $ 46,284,000.00 21 2000 $ 45,361,000.00 19 2001 2002 2003 2004 2005 2006 2007 Total $ $ $ $ $ $ $ $ 5,700,000.00 6,123,000.00 2,116,000.00 3,999,900.00 3,365,000.00 17,735,000.00 5,700,000.00 221,106,400.00 5 7 5 3 4 4 2 112 As the chart illustrates, Tennessee is falling significantly behind in funding local start-up ventures. 6 In an effort to encourage start-up financing, over 22 states have established tax credits for angel investors. Depending on the state, the credits range from 15% to 50% of the amount invested. Each state has unique provisions. Louisiana requires angels to demonstrate that at least half of the sales recorded by the businesses they funded come from out of state. Arizona prohibits investors who finance embryonic stem cell research. These programs have become more popular as a smaller share of institutional venture capital funds is invested at the seed stage—less than 2%. By far the largest sources of funds for seed capital are angel investors. V. Review of Other State Credits2 A. North Carolina Angel Tax Credit Program In an article published by the State Science and Technology Institute North Carolina does not, at first glance, seem to be a venture capital underperformer. In 2006, venture capitalists invested close to $510 million in North Carolina, almost $60 million of which was invested in seed and early-stage businesses, according to the Pricewaterhouse Coopers Moneytree Survey of VC investment. However, while the state ranks 12th in seed/early-stage investment, many in the state perceive the lack of seed funding to be a major obstacle to economic growth. Earlier this year, a survey conducted by the Wilmington-based Council on Entrepreneurial Development (CED) revealed that access to capital, particularly to seed-stage equity investment, was one of the top concerns of entrepreneurs in the state. The North Carolina Small Business and Technology Development Center (SBTDC) recently announced a new plan to make capital available to entrepreneurs and begin building a stronger earlystage investment industry. In 2003, SBTDC launched the Inception Micro Angel Fund (IMAF) in the Piedmont Triad area of North Carolina, with an investment zone that included Greater North Carolina and selected areas of South Carolina and Virginia. SBTDC now plans to build on the success of IMAF-Triad by creating a statewide network of six angel funds that will provide capital to new businesses in every part of the state. The new funds will be able to provide local support for nascent businesses and improve the stream of promising mid-to-late-stage companies for venture capital investment. This family of seed-stage funds will target technology-based companies and will provide mentoring, counseling, and networking opportunities to their investees. Each of the six funds will use a similar, member2 By Daniel Sandler, Professor at the Faculty of Law, The University of Western Ontario, London; senior research fellow of the Taxation Law and Policy Research Institute, Melbourne; associated with Minden Gross Grafstein & Greenstein LLP, Toronto. The comments in this chapter are derived from Daniel Sandler, Venture Capital and Tax Incentives: A Comparative Study of Canada and the United States (Toronto: Canadian Tax Foundation, 2004) (“Sandler VC Study”). 7 managed structure and will seek investments from larger angel funds, venture funds and individual angel investors. The IMAF-Triad fund is now in the process of raising $2 million for its second round and primarily engages with investors from the medical and dental fields. Individual angels can buy into the fund with a minimum investment of $15,000; the level is $30,000 for angel groups and VC firms. Typical investments will range between $25,000 and $100,000. The IMAF Source Capital Fund will provide the capital for each local fund and will follow up on successful local investments with additional financial and advisory support. One of the new funds (ITAF-RTP) will focus on investments in the Research Triangle Park region, including spin out companies from Duke University, UNC Chapel Hill, associated medical schools from both of those universities, North Carolina Central University, and NC State University. In 2005, CED reported that the Research Triangle region raised 81 percent of all venture investment in the state, including seven of the top 10 deals that year. The areas of the state outside of the Research Triangle and Piedmont Triad regions, which will be served by the other four new funds (IMAF-West, IMAF-East, IMAF-Coastal, and IMAF-Kannapolis), received only 18.5 percent of venture capital investment that year. SBTDC officials hope that the new family of funds will provide a more even distribution of capital and other business resources across the state. One of North Carolina's previous efforts to build a strong statewide angel marketplace is now up for extension at the state assembly. The Qualified Business Venture Tax Credit (QBV) is estimated to have raised $1.7 billion in equity financing from when its creation in 1999 through last year, according to data from the North Carolina Biosciences Organization and the North Carolina Entrepreneurial Association. The credit is scheduled to expire at the end of this year. Under the current legislation, angel investors may receive a 25 percent personal income tax credit for individual investments in businesses with less than $5 million in annual revenue. The QBV credit encourages investment in new businesses engaged primarily in manufacturing, processing, warehousing, wholesaling, or R&D. State Representative Bill Daughtridge recently introduced a bill extending the credit through 2010, noting that before it existed the state frequently lost entrepreneurs and small businesses to other states. Though angel investment fell dramatically in North Carolina following the tech bust in the early part of the decade, investment in QBV-eligible companies has grown more than 60 percent since 2004. B. Maine Seed Capital Tax Credit Program This program is designed to encourage equity and near equity investments in young business ventures, directly and through private venture capital funds. FAME may authorize State income tax credits to investors for up to 60% of the cash equity they provide to eligible Maine businesses. Investments may be used for fixed assets, research or working capital. Eligibility: 8       Businesses located in Maine Investors must own less than an aggregate of 50% of the business Principal owners and their immediate relatives are not eligible Annual gross sales of less than $3 million Business must either: 1) be a manufacturer; 2) provide goods or services with 60% of sales derived from outside the State or to out-of-state residents; 3) develop or apply advanced technologies; 4) bring significant permanent capital into the State Must be the professional, full-time activity of at least one of the principal owners Basic Terms:       Tax credits equal to 40% of the investment - 60% for investments made in businesses located in high unemployment areas (contact FAME for a current list of eligible areas) An investor may provide up to $500,000 per business Aggregate investment limit per business is $5 million for which tax credit may be received Investments must be at risk for 5 years Credits must be taken in increments of 25% (of the credit) per year for the 4 years following the investment. Credits used cannot exceed 50% of the total tax due by the investor for that taxable year before application of the tax credit. To the extent this limitation requires the taxpayer to take the credit over more than 4 years, unused credits may be carried forward no more than 15 years. For a more thorough description of the Program and any limitations thereon, refer to Chapter 307 of the FAME Rule. Special rules for venture capital funds:      Investors may provide up to $1,000,000 per venture capital fund in any consecutive 3-year period. Investors in any one venture capital fund cannot receive more than $5,000,000 in credits, but may invest more without credit. Investors in certain qualifying venture capital funds may receive one half of this credit (up to 20%) at the time of investment. The remaining amount of an investor's tax credit will be awarded when and if the venture capital fund invests sufficient monies in an eligible Maine business. Credits will be revoked if not substantiated within 3 years. Investment into venture capital funds must be at risk and principal may not be paid without FAME consent for 5 years. Dividends, royalties, interest, stock options or warrants and other forms of return, which are not in the nature of return of principal, are allowed. Reporting Requirements: Businesses receiving investments for which credits are issued, must file annual reports with 9 information on the total investments received, number of employees and jobs created/retained, annual payroll and total sales revenue. Failure to file reports will result in ineligibility and possible revocation of credits issued in the reporting period (the prior year). Fees:    $250 per business (one time fee) $100 per investor, per investment $250 per venture capital fund C. Arizona Angel Investor’s Tax Credit – SB 1335 Purpose – to expand early stage investment in Arizona’s small businesses. Background - Small businesses comprise more than 80% of Arizona’s economy. Assisting small businesses as they grow, particularly those well positioned to create high wage jobs, is critical to Arizona’s economic growth. A significant area of need for small businesses is access to “early-stage” equity capital when building their operations. This is so because they are too small to secure adequate financing through bank loans and other traditional sources of capital, or enter the stock market as a publicly traded company. Private equity investments by individuals and specialized “angel” funds and venture capital firms can be used by small businesses to gain access to these resources. Yet, as the economy boomed in the latter half of the decade and “early stage” and “venture” capital investments soared nationwide, Arizona fell behind. Arizona cannot afford to lose its knowledge-based small businesses to other states. The critical shortage of equity capital for new businesses in Arizona represents a serious shortcoming and, as a result, small, homegrown businesses face difficulties in expanding operations and taking new ideas, products and services to market. Description of Program - A state tax credit is made available to investors who invest in early-stage “qualified small businesses.” The credit is 30% of the investment, increasing to 35% for investments in bioscience companies and companies located in rural Arizona. The credit may be offset against AZ taxable income in equal amounts over a 3-year period. The credits are not transferable. A “qualified investment” must be an equity investment in a minimum amount of $25,000 per investment and each investor is limited to a maximum of $250,000 in investments in all qualified 10 small businesses eligible for the credit per year. Credits are not available to persons who already hold 30% or more of the equity of a qualified small business. A “qualified small business” must: 1. Have at least a portion of its operations in Arizona; 2. Have at least two full-time principal employees or full-time independent contractors in Arizona; 3. Not have a principal business in retail, restaurants, real estate, professional services, personal services or health care services; 4. Have total assets less than $2 million; and 5. Have received not more than $2 million in investments eligible for the credit. The total tax credits are capped at $20 million over a 5-year period with no general fund impact in fiscal year 2006. Credits will be available to investors on a first-come, first serve basis. D. Louisiana Angel Tax Credit The Angel Investor Tax Credit Program Act of 2005 (Act 400) enhances the Louisiana entrepreneurial business environment by rewarding qualified individual investors for investing in early stage, wealth-creating businesses. Investors can receive refundable Louisiana income or corporation franchise tax credits of up to 50 percent of the money invested. The total angel investor tax credits shall not exceed $5 million. Qualification for the tax benefits of Act 400 requires that both the entrepreneurial business and the investor(s) meet the following specific certification requirements: Louisiana Entrepreneurial Business  a fully developed business plan  the principal business operations are located in Louisiana including Louisiana as the primary place of employment for the employees of the business;  the business operates as a person defined as an “employer” within the meaning of the state's Quality Jobs Rules;  the number of jobs to be created, and the title and salary ranges of those jobs;  the business is not primarily engaged in the business of retail sales, real estate, professional services, gaming or gambling, natural resource extraction or exploration, or financial services including venture capital funds;  the business has a plan or progression through which more than 50 percent of its sales will be derived from outside Louisiana ;  the amount of investment requested and a Source and Use statement showing that the investment funds will be used for capital improvements, plant and equipment, research and development, working capital for the business or other business activity approved by LED; and  the Louisiana Tax Identification Number of the business. 11 UNDER NO CIRCUMSTANCES SHALL THE LED SECRETARY'S CERTIFICATION OF THE APPLICANT AS A LOUISIANA ENTREPRENEURIAL BUSINESS BE CONSIDERED OR IMPLIED TO BE AN ENDORSEMENT OF THE BUSINESS OR ANY INVESTMENT IN THAT BUSINESS, AND THE APPLICANT SHALL SO ADVISE ALL INVESTORS OF THIS FACT. Accredited Investor - To qualify for an angel investor tax credit, all of the following qualifications shall be required of each applicant:        the investment in the Louisiana Entrepreneurial Business must be an investment that is at risk and not secured or guaranteed; the funds invested by the applicant cannot have been raised as a result of other Louisiana tax incentive programs, funds pooled or organized through capital placement agreements or as the result of illegal activity; the angel investor, as defined, cannot be the principal owner of the business who is involved in the operation of the business as a full-time professional activity; the investment in the Louisiana Entrepreneurial Business by the applicant must be maintained for three years; an Accredited Investor shall be defined as: an Angel Pool, all of whose participants shall be Accredited Investors; a natural person who has individual or joint net worth that exceeds $1 million at the time of the investment and individual income exceeding $200,000, or joint income exceeding $300,000. 12 VI. Proposed Credit for Tennessee Purpose: To encourage institutional investment in Tennessee-based start-up ventures. The purpose of Angel funds being the entities with which the credit is tied is to minimize the administrative burden on the state and to build up funds to supplement and support the individual and Angel network investments already being made. Basic Terms:  Tax credits equal to 50% of the investment made by the Corporation into the Angel Fund not to exceed $500,000 per corporation.  Total funds available for credit are $15 million per year.  Credits must be taken in increments of 25% (of the credit) per year for the 4 years following the investment.  Credits used cannot exceed 50% of the total tax due by the investor for that taxable year before application of the tax credit.  To the extent this limitation requires the taxpayer to take the credit over more than 4 years, unused credits may be carried forward no more than 15 years. Qualifying Angel Funds:  An investment company located in Tennessee with the sole purpose of providing funding to companies in the seed or early stages  Fund may provide up to $1 million in funding per business  Aggregate investment limit per business is $5 million  An Angel Fund must invest in companies meeting the following criteria: o Businesses located in Tennessee o The Fund must own less than an aggregate of 50% of the business o Annual gross sales of less than $3 million o Business must either: 1) be a manufacturer; 2) develop or apply advanced technologies; 3) or bring significant permanent capital into the State o Must be the professional, full-time activity of at least one of the principal owners 13 VII. Access to Capital for Entrepreneurs (ACE) Act (H.R. 578) Fact Sheet  This legislation was introduced on January 19, 2007 by Rep. Earl Pomeroy (D-ND), a member of the Ways and Means Committee and Rep. Donald Manzullo (R-IL), a member of the Financial Services Committee. The ACE Act would create a 25-percent tax credit for accredited investors and certain partnerships, including angel investment pools if all are accredited investors, which invest cash in a qualified small business. An angel investment pool is a group of investors who come together to pursue common investments. To qualify for the tax credit, an investor would have to hold onto the investment for at least three years. The maximum amount eligible for the credit is $250,000 per investment and a total of $500,000 per qualified individual investor. The Access to Capital for Entrepreneurs (ACE) Act was developed to fill a gap in current equity funding. Generally, venture capitalists invest a minimum of $6 to $7 million in mature companies. Venture capitalists have become more risk adverse and tend to limit their investments to certain high growth sectors of the economy, such as life sciences and software. By contrast, angel investors take more risks and invest locally or regionally. However, the maximum amount invested by angel investors typically is between $500,000 and $1 million. Thus, there is currently a substantial gap in equity funding between angel investors and venture capitalists. This bill addresses the equity gap by encouraging current accredited investors to increase equity investments in certain qualified small businesses. According to the Center for Venture Research, 227,000 angel investors invested more than $23 billion into new ventures in 2005, the year for which the most recent data are available, creating 198,000 new jobs, or 4 new jobs per angel investment. This is the first federal credit of its kind. Twenty-one states, including North Dakota, currently offer some sort of income tax credit to encourage such private investments in early stage businesses. The legislation is the result of the work of a nine person panel of experts, which included Bruce Gjovig, director of the University of North Dakota Center for Innovation.         14 VIII. 2007 Investment Bill Section-by-Section A. Title I. SBIC Program Section 1. Simplified Maximum Leverage Limits This provision will simplify the leverage cap rules and relax restrictions on the amount of leverage available to SBICs that are under common control. Section 2. Increased Investments in Women-Owned and Socially Disadvantaged Small Businesses This section will establish an incentive to form funds focused on investment in minority and women owned businesses by permitting such funds to operate with increased maximum leverage limits. Section 3. Increased Investments in Smaller Enterprises This section will also increase overall investments in smaller enterprises by requiring funds, as a condition of receiving leverage, to certify that not less than 25% of the funds financings go to smaller enterprises. Section 4. Simplified Aggregate Investment Limitations This section will revise the current limit on the amount that can be invested in any one portfolio company to standards that are more consistent with industry accepted portfolio risk management practices. B. Title II. New Markets Venture Capital Program Section 1. Expansion of New Markets Venture Capital Program. This section would require, the Administrator to actively engage in the activities to expand the New Markets Venture Capital Program. This section would also require the Administrator to perform a study on their success in expanding the NMVC program. Section 2. Improved Nationwide Distribution This section will require the Administrator to select at least one company from each of the SBA’s geographic regions as part of its efforts to expand the program. 15 Section 3. Increased Investment In Small Manufacturers This section will reduce the capital requirements required for NMVC companies primarily engaged in investment in small manufacturers, making it easier for these companies to secure final approval. Section 4. Updating Definition of Low-Income Geographic Area This section would amend the current definition of “low-income geographic area” as it relates to metropolitan areas to provide more conformity between the New Markets Venture Capital program and the New Markets Tax Credit program. The amendment will define a low-income geographic area as those in which the median household income of a population census tract does not exceed 80 percent of the greater of the statewide median household income or the metropolitan area median household income. Section 5. Study on Availability of Equity Capital This section also requires the Chief Counsel for Advocacy of the SBA to conduct a study on the availability of equity capital in low-income urban and rural areas and report its findings to Congress within 90 days of the study’s completion. Section 6. Expanding Operational Assistance to Conditionally Approved Companies This section will permit New Markets Venture Capital Companies that have received conditional approval from the SBA under Section 354 to receive early grant assistance up to $50,000 at the point of initial designation. In the event that a conditionally approved NMVC company fails to win final approval, the grant would be repaid to the SBA. If the company wins final approval, however, amount of early grant assistance will be deducted from the total amount of operational grant assistance the company receives. This section further provides NMVC companies with two full years to raise private capital and matching funds for operational assistance. Currently, these companies have up to two years under current law. Section 7. Streamlined Application For New Markets Venture Capital Program This section will require the SBA to develop a set of documents that reduce the cost and burden for New Markets Venture Capital companies applying for final approval under the program. These documents must be created within 60 days after the enactment of the bill. 16 Section 8. Elimination of Matching Requirement This section will eliminate the minimum amount of matching commitments for operational assistance that an NMVC company must raise before receiving final approval. Currently, this minimum is set at not less than 30 percent of the total amount of private capital or binding capital commitments the NMVC company has raised. Section 9. Simplified Formula for Operational Assistance Grants This section will revise the amount of operational assistance grants a NMVC company may receive. The new amounts will be equal to either 10 percent of the private resources the company has raised for operational assistance, or $1 million, whichever is less. Section 10. Authorization of Appropriations and Dedication to Small Manufacturing This section reauthorizes appropriations to fund debenture guarantees and OA grants for fiscal years 2008, 2009, and 2010 and requires that at least a quarter of these authorized funds be used for the purpose of entering into participation agreements and providing operational assistance to small manufacturers. C. Title III. Angel Investment Program Establishment of Angel Investment Program This legislation will establish an Office of Angel Investment within the Investment Division of the SBA. This office will be headed by a Director of Angel Investment, who will be responsible for administering the Angel Finance Program and Federal Angel Network established by the bill. As with other SBA programs, the Angel Finance Program will function as a public-private partnership between the SBA and privately organized “angel groups.” Angel groups will consist of ten or more accredited investors (as that term is defined under Rule 501 of Regulation D of the Securities and Exchange Act of 1933, 17 C.F.R. Part 230 et seq.) that are licensed by the SBA specifically for the purpose of making investments early stage domestic small business concerns. In exchange for complying with the program’s licensing and investment requirements, angel groups will receive up to $2 million in leverage financing from the SBA. Leverage financing that angel groups receive must be invested in a local small business concern with an equal or greater amount of private investment capital raised by the angel group. Leverage will be repaid with a pro rata share of investment returns relative to the amount of leverage that angel 17 groups receive on their investments. As leverage is repaid, amounts collected by the SBA will be deposited in an Angel Investment Fund at the U.S. Treasury. The Angel Investment Fund will serve as a revolving source of leverage financing for the Angel Finance Program to operate without regard to fiscal year limitations. The legislation will also create Federal Angel Network within the Office of Angel Investment that will collect and maintain information on local and regional angel investors and angel groups. This information will include a list of names and addresses of angel groups and angel investors, information about the types of investments each angel investor or angel group has made, and information on other public and private resources on angel investors and angel groups. This information will be maintained in a regularly updated searchable database available through the SBA’s database. Additionally, information contained within the database will be readily available for use and distribution by other angel networks and groups, thereby augmenting the exposure of the Federal Angel Network. Angel investors and angel groups will have the option of excluding their information from the network. Finally, the Administrator will also carry-out a grant program to make grants to entities that develop new or existing angel groups or to increase awareness and education about angel investing. Grant recipients could include units of state or local governments, nonprofit organizations, or Small Business Development Centers or Women Business Centers established under the Small Business Act. To receive grant assistance, however, eligible entities must raise matching funds equal to half of the grant amount, thus strengthening their commitment and amplifying the grant assistance itself. D. Title IV. Surety Bond Program Section 1. Study and Report Within 180 days of enactment of this section, the Administrator shall conduct a study of the program’s current funding structure and report its results to Congress. This study shall include: (1) An assessment of whether the program’s current funding framework and program fees are retarding the program’s growth; (2) An assessment of whether surety companies and small business concerns could benefit from an alternative funding structure; (3) An assessment of whether permissible premium rates fore surety companies participating in the program should be placed on parity with the rates authorized by appropriate state insurance regulators and how such a change would affect the program under the current funding framework. Section 2. Preferred Surety Bond Program 18 This provision will establish explicit statutory authority for a preferred surety bond program that would essentially mirror the preferred lender program under section 7(a) of the Small Business Act. Under the PSB program, the Administrator shall carry out a program under which a written agreement between the surety and the Administration delegates to the surety complete authority to issue, monitor, and service bonds subject to guaranty from the Administration without obtaining the prior specific approval of the Administration. The Administration may recertify PSB sureties for an additional term not to exceed two years. Prior to recertification, the Administration shall review a surety’s bonds, policies, and procedures for compliance with relevant rules and regulations. Bonds made under this program shall carry a 70% guaranty. Section 3. Denial of Liability For bonds made or executed with the Administration’s prior approval, the Administration shall not deny liability to a surety based upon information that was provided as part of the guaranty application. Section 4. Increasing the Bond Threshold This section will increase the maximum permissible bond amount from $2 million to $3 million. Section 5. Fees This section will permit the Administrator to make contributions for the purpose of reducing fees, if and when an appropriation is made available for that purpose. E. Title V. Venture Capital Investment Section 1. Determining Whether Business concern is Independently Owned and Operated This section specifies that the SBA shall not consider venture capital investment in determining whether or not a company is defined as a small business. F. Title VI. Regulations Section 1. Regulations This section requires the SBA to promulgate revisions implementing necessary regulatory changes within 90 days. 19